Opto Circuits (India) (OCIL) is the sole manufacturer of opto-electronic based medical equipment in the country. The company is issuing 40 lakh equity shares through a follow-on public offering to finance its recent acquisition of cardiac stent manufacturer EuroCor and tone up its R&D, manufacturing and marketing activities.
Out of the total issue proceeds, Rs 27.21 crore has been allocated for the acquisition of EuroCor. OCIL has paid 22.71 crore to acquire the equity of EuroCor and its debts. Further payment of euro 0.5 million will be made in two equal installments on 31 March 2006 and 30 June 2006. Besides, Rs 19.38 crore has been allocated for upgrading the R&D facility, Rs 16.35 crore for upgrading manufacturing facility, Rs 22.5 crore for additional working capital requirement, and Rs 7.5 crore for investing in marketing offices of 100% US subsidiary Mediaid.
On a standalone basis, OCIL manufactures non-invasive electronic patient care products and markets them through its business associates in Europe and the US and subsidiaries in India and the US. The company has been operating as a 100% EOU since its incorporation in 1992.
Since its initial public offering in 2000, OCIL has adopted an inorganic business model for gaining better market access for its products and increasing its product lines in the growing health care segment. It acquired a majority stake in the listed Advance Micronic Devices (AMDL) in 2001 for marketing its products in the country. In 2002, the company acquired the patient monitoring system of US-based Palco Labs, later renamed Mediaid and now a 100% subsidiary of the company in US. Currently Mediaid is responsible for selling OCIL's products in the US and other parts of the world.
In 2004, OCIL acquired a 100% stake in Altron, an electronic manufacturing concern in Bangalore. The company recently diversified into invasive healthcare products by purchasing the Germany-based stent manufacturing company EuroCor. The company intends to continue the inorganic business strategy in future as well.
Strengths
*On a consolidated basis, OCIL has a focused presence in the growing healthcare market and has a global marketing presence through its associate companies.
* The recent competitive acquisition of EuroCor will provide incentive for better sales performance by EuroCor in the next two years.
* Due to its EOU status (valid till 2009) and manufacturing presence in India, OCIL enjoys better-cost advantages compared with its global competitors. This ensures growing manufacturing outsourcing by global peers as well. In this context, the R&D expansion to supply products as per the needs of the original equipment manufacturers, is a positive step.
Weaknesses
*OCIL books its sales by selling its products to group companies and 100% subsidiaries. They sell the products to end-users. This entails not only a greater credit period but also a credit default risk for the company.
*Due to the typical characteristic of its products and the batch manufacturing process, the company has to maintain high inventory level.
*In FY 2005, standalone net profit jumped 48% to Rs 19.20 crore, but cash flow from operating activities was up only 11% to Rs 10.78 crore. In the first six months of the current year, the cash flow is negative Rs 6.02 crore. The cash flow record of all its subsidiaries is also poor.
*None of the products of the companies or subsidiaries acquired are patented and will have to fight it out on cost and service.
*OCIL's strategy of inorganic growth increases its risk profile.
* Though it has got a good marketing set up all over the world, EuroCor's stent marketing needs a specialised marketing force and product promotion. Also, OCIL derives 74% of its turnover from the US, where EuroCor is yet to get approval for selling its products. Moreover, EuroCor is a loss-making company and its cash flow has been negative since the past five years.
Valuations
OCIL made small bonus issues (2:10 in 2003, 3:10 in 2004 and 5:10 in 2005) consecutively over the last three years. However, such pattern does not instill confidence.
On a standalone basis, OCIL reported sales of Rs 80.59 crore in the nine months ended December 2005. This is 60% higher than the sales of the corresponding period last year. The standalone net profit went up by 97% to Rs 23.63 crore compared with the corresponding quarter last year. However, the company has provided a cash flow statement for six months only. In these six months, the cash flow from operating activities was negative Rs 6.02 crore.
On a consolidated basis OCIL had reported sales of Rs 122.84 crore in FY 2005. The net profit was Rs 17.48 crore. In the six months ended September 2005, the consolidated sales and net profit were Rs 63.3 crore and Rs 9.77 crore, respectively.
OCIL is trading at Rs 276 on the bourses, which is 15% and 2% higher than the lower and upper band offer price of the issue. The six-month average share price is Rs 250. The business of the company is not comparable with any other listed electronics component company. The lower and upper price bands discount the annualised FY06 consolidated EPS of Rs 6.3 (on post-IPO equity) by 38 and 43 times, respectively, which is high